Insurance and Economy and Government

Government intervention: cure is as bad as disease ECONOMIC ANALYSIS: Government intervention: cure is as bad as disease

June 6, 2005

ECONOMIC ANALYSIS Government intervention: cure is as bad as disease

As you get older, you come to appreciate the old adage about doctors: They don't actually cure you, but they do sometimes let you trade in one ailment for another.

That could be said equally for almost every situation where governments intervene in the privatesector economy. The solution to a problem inevitably creates a new problem. And in some cases, the cure is worse-and longer-lived-than the disease.

We have come to expect our governments to take some of the hard edges off of market capitalism. After all, in the marketplace, it's dollars that vote, not people. And in the "creative destruction" of the private economy, where risky investments go sour and businesses fail, people get hurt.

We want to help those people, so we have institutions and programs like unemployment insurance, pension benefit insurance and even Social Security. And in some cases, we have propped up big companies like Chrysler in the 1980s and the airlines today, when it looked like their failure would hurt thousands of families.

And those actions have created more problems.

Unemployment insurance, while hugely successful in stabilizing the economy during economic downturns and giving workers breathing space to find new jobs, creates problems for the economy as well. The premiums collected from employers do not adequately reflect their past layoff experience. Thus, companies and workers alike can game the system by dipping into UI funds for ordinary and predictable situations like plant changeovers and seasonal shutdowns. The result is that stable employers wind up subsidizing those with more irregular employment needs.

Those problems are tiny compared with those caused by the higher-profile interventions of recent years.

Just look at the recent United Airlines situation, where the company turned its back on its pension obligations underfunded by a cool $9.8 billion. That in itself is nothing new. As thousands of steelworkers know all too well, when companies fail, their promises to pay fail with them.

The difference is that United was able to transfer $5 billion of that burden to the federal government through the Pension Benefit Guarantee Corp. set up to insure private pensions. To the chagrin of its competition, the struggling airline now has the $645 million a year it would have spent on pensions available for other needs, while the PBGC picks up at least part of the tab.

But PBGC itself is underfunded, charging premiums to companies that fall well short of what is actuarially required to cover its exposure to pension default. This sets up a dangerous situation where companies can gain a competitive edge by defaulting on their pensions, then letting the PBGC-and potentially taxpayers-pick up the bill.

At least in the case of pension insurance we are addressing a current problem. But we still subsidize rural electrical cooperatives when almost every farm has electricity, and savings and loan institutions at a time when homeownership rates-not to mention the numbers of mortgage brokers-are at an all-time high. And speaking of home ownership, can anyone explain why an organization like the federally sponsored Fannie Mae, which is supposed to help low- and middle-income families finance homes, is so amazingly profitable?

These solutions to non-existent problems at best waste money and distort investment patterns in the marketplace. At worst, they promote reckless behavior and expose taxpayers to risks they don't even know about.



Barkey is an economist and director of economic and policy studies at the Miller College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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